I cannot comment on Vems Atmel processor, but some of the processors we use at work, when they fail, tend to show symptoms like these. They sometimes also refuse to leave bootloader no matter what you do. We replace the boards in this situation. It may be possible to reflash the bootloader.
I have experienced issues with upgrading from 1.0.x firmwares to the earlier 1.1.xx firmwares 1.1.4X I think, most of that was down to the baud rates, and it made it difficult to revert back too. Aslo, if while uploading firmware it goes bad in the middle, the Vems.hex file can sometimes end up blank, and any subsequent upload tries to upload a blank hex file.
I would download a fresh 1.0.73 firmware package
http://media.vems.se/code/VemsMT1.0.73Final.zip and use the batch files in the route directory to upload the firmware. You must edit the batch file to ensure you are uploading the correct air and coolant factor patchs, and also ensure the correct com port. I have never used the comand prompt to upload firmware, the batch file does that. Force bootloader with the paperclip. Make sure you are doing this right as its not quite clear how this should be done. With the power off, bridge serial port Dsub pins 2 and 3, power up, then remove the bridge with power still on, connect com cable and upload firmware.
Once you have done that, open Megatune within the 1.0.73 firmware package. If you are still having problems then, without the input from the developers, I would have to say that the processor, or at least the bootloader is corrupt.
If I have been telling you something you already know, I appologise